Dig­ging in for a Long Fight

Global Asia - - CONTENTS - By Si­mon Lester

Us Pres­i­dent Don­ald trump is lead­ing his coun­try into a trade quag­mire. Grow­ing hos­til­ity to­wards China will be hard to pull back from.

Us Pres­i­dent Don­ald trump fre­quently pro­claims his de­sire to “drain the swamp.” In Uschina trade relations, how­ever, he is steadily lead­ing the United states into a quag­mire from which it may be dif­fi­cult to es­cape. skep­ti­cism and hos­til­ity to­wards China among Us politi­cians and com­men­ta­tors ex­isted long be­fore trump, but the in­ten­si­fi­ca­tion of the rhetoric, and ag­gres­sive ac­tions taken in re­cent months, will be dif­fi­cult to undo or pull back from, at least for this ad­min­is­tra­tion.

like all coun­tries, China is guilty of a num­ber of trade sins. there are sec­tors in which it is highly pro­tec­tion­ist, and it has only re­cently be­gun to fol­low rich coun­try norms on in­tel­lec­tual prop­erty. China is not the only of­fender, of course, but given its eco­nomic size and its au­thor­i­tar­ian pol­i­tics, it is not sur­pris­ing that China is the tar­get of the most in­tense crit­i­cism.

What is sur­pris­ing is the strat­egy taken by the trump ad­min­is­tra­tion to ad­dress these is­sues. While the Barack Obama ad­min­is­tra­tion tried to work within mul­ti­lat­eral rules, the trump ad­min­is­tra­tion has de­cided to go it alone. It is im­pos­ing tar­iffs on China that clearly flout World trade Or­ga­ni­za­tion (WTO) obli­ga­tions, and which do not ap­pear to be achiev­ing the ob­jec­tive of prompt­ing re­form in China.

In­stead, we are in the midst of a back-and-forth game of tar­iff es­ca­la­tion. the Us im­poses tar­iffs on Us$34 bil­lion of im­ports; China matches it. the Us adds tar­iffs on an­other Us$16 bil­lion of im­ports; China matches that. the Us is now threat­en­ing tar­iffs on $200 bil­lion of im­ports; China doesn’t im­port enough from the Us to match that, but it will im­pose tar­iffs on all the im­ports it can. If this keeps go­ing, both sides will be im­pos­ing tar­iffs on all im­ports from each other, and per­haps tak­ing other re­tal­ia­tory ac­tions as well.

the ad­min­is­tra­tion’s de­fense of its poli­cies is that other meth­ods of deal­ing with China have been tried and did not work. the ad­min­is­tra­tion ac­cuses China of cheat­ing, and says the WTO can­not han­dle China’s unique brand of state in­ter­ven­tion. there have even been sug­ges­tions that China’s en­try into the WTO on the terms agreed in 1999 was a mis­take.

the re­al­ity is that WTO lit­i­ga­tion against China’s trade prac­tices has worked quite well, where it has been used. China does as well as other coun­tries at com­pli­ance when chal­lenged in a WTO com­plaint. the prob­lem is that WTO dis­pute set­tle­ment needs to be used more. But the trump ad­min­is­tra­tion is not lis­ten­ing to this crit­i­cism (it has filed only one new WTO com­plaint). It is re­ly­ing mostly on tar­iffs in­stead.

and de­spite the con­cerns of economists and af­fected com­pa­nies, the ad­min­is­tra­tion shows no sign of let­ting up. as long as the Us econ­omy is do­ing well, the ad­min­is­tra­tion is con­fi­dent that it will win this bat­tle. the logic is sim­ple: Us im­ports from China are much greater than Chi­nese im­ports from the Us. there­fore, in a con­test of tar­iffs on im­ports, the Us will come out ahead.

this view is mis­taken for a num­ber of rea­sons. First, while so far China has fo­cused on equiv­a­lent tar­iff re­tal­i­a­tion, it can re­tal­i­ate with more than just tar­iffs. China could pe­nal­ize Us com­pa­nies op­er­at­ing in China in a va­ri­ety of ways.

sec­ond, the Us tar­iffs hurt amer­i­cans just as

much as they hurt Chi­nese pro­duc­ers. tar­iffs are taxes that are ul­ti­mately paid by im­porters and con­sumers, and thus the ad­min­is­tra­tion’s ap­proach harms amer­i­cans (and then the Chi­nese re­tal­i­a­tion harms them more).

and third, as much as the trump ad­min­is­tra­tion would like China to back down, po­lit­i­cally speak­ing, it would be very dif­fi­cult for China to do so. Public de­mands for uni­lat­eral con­ces­sions from China, which would make China look weak if it agreed to them, are dif­fi­cult to ac­cept.

so how will this end? Per­haps China will cave, al­though most China ex­perts think this is un­likely. and even if China wanted to cave, it is not clear ex­actly what would sat­isfy the trump ad­min­is­tra­tion. While the ad­min­is­tra­tion shows no signs of back­ing down, there are two pos­si­ble events that could lead to some re­con­sid­er­a­tion of its ap­proach: a slow­ing of the econ­omy and the re­sults of the Us midterm elec­tions.

Part of the con­fi­dence the trump ad­min­is­tra­tion has right now is de­rived from the strong Us econ­omy. De­spite all of the tar­iff ac­tions in re­cent months, the Us econ­omy is still do­ing well. But these tar­iffs are still rel­a­tively new and have only af­fected a small amount of trade so far. as the trump ad­min­is­tra­tion con­tin­ues to push for­ward with tar­iffs, the im­pact should be­come more no­tice­able.

as for the midterm elec­tions, if the Democrats win one or more houses of Congress, the do­mes­tic po­lit­i­cal land­scape could change con­sid­er­ably. the trump ad­min­is­tra­tion might spend most of its time de­fend­ing it­self from con­gres­sional in­ves­ti­ga­tions, and its flex­i­bil­ity to un­der­take trade pol­icy could be di­min­ished.

In the mean­time, we watch the es­ca­la­tion ner­vously and war­ily. the key play­ers in the trump ad­min­is­tra­tion are not in­ter­ested in other per­spec­tives, which means that lit­tle can be done to en­cour­age a change in ap­proach. We all have to dig in for a long trade bat­tle, and hope there are not too many ca­su­al­ties.

si­mon lester is as­so­ci­ate di­rec­tor of the her­bert a. stiefel Cen­ter for trade pol­icy stud­ies at the Cato in­sti­tute, wash­ing­ton dc.

De­spite the con­cerns of economists and af­fected com­pa­nies, the US ad­min­is­tra­tion shows no sign of let­ting up. As long as the US econ­omy is do­ing well, the ad­min­is­tra­tion is con­fi­dent that it will win this bat­tle. The logic is sim­ple: US im­ports from China are much greater than Chi­nese im­ports from the US. There­fore, in a con­test of tar­iffs on im­ports, the US will come out ahead.

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